@mikebrisy, yeah what a week for Neuron, it was a pretty confused trade in the first hour or so after it reopened. I also picked up some more shares, after quickly reading the announcement, as I think the continued derisking of NZ2551 is worth increasing my position.

One part of the Neuron valuation that I am rethinking is the binary aspect of the company. I had previously been thinking daybue had derisked it and like others I can get a valuation from this portion of the business that provides a margin of safety at today’s price, and was considering NZ2551 as a free carry option. The problem that I am having is that I’m not sure this is the right way to value the risk of Neuron as most if not all of the revenue coming from Daybue will be recycled back into NZ2551 development, so if phase 3 trials are successful then we win big and if they are a bust then then the value is much smaller than todays price due to the investment of capital at zero or very low rates of return. I don’t think there will be any capital return to SH without a successful development of NZ2551. The safety and efficacy of NZ2551 do look very promising at this stage though and I am happy to accept more risk here.

I’m curious how others are viewing this and whether people view this type of risk just a part of these types of companies.

The most obvious observation is that NZ2551 is being positioned as a "platform drug".

In other words, NZ2551 is being investigated by Neuren to treat multiple indications.

Or in generic "business terms", a product to serve multiple applications.

This has been mentioned before but it doesn't hurt to mention again I guess.

Although it is still early stage, I think this is still quite encouraging and worth pointing out.

It is funny that I've been looking at this with other early-stage pharma companies including NASDAQ and never really noticed this in Neuren till recently because there has been too much mention on Daybue and Acadia.

@edgescape, I’m not really sure that positioning NN2551 as a platform drug actually reduces the risk of phase 3 failure. I think it more increases the potential prize if successful.

The mechanism of action is effectively the same across the conditions so I don’t think it will work in some and not others. The 3 phase 2 results to date have been very encouraging so odds are positive for continued success, but biology often gets in the way of a good plan.

@Slideup I have given this some thought.

As Jon confirmed on the call, with $200m, $NEU has enough cash on hand to fund two Phase 3 trials - which are most likely going to be PMS and PH. Rare disease trials typically involve fewer patients, and for orphan products the end points can be less challenging. Add to this the collective body of data across all phase 2 trials for NNZ-2591, which $NEU hope to secure a less onerous safety regime to the trial, which in turn will increase enrolment/reduce dropouts and reduce cost per trial candidate.

At this stage I am thinking about $NEU in simple terms. In the success case, Trofinetide grows to penetrate 50-60% of the US market, and so on my numbers generates further royalties and milestones, passing $500m and perhaps the $750m in US sales revenue milestones - a peak year delivering $250m revenue to $NEU. On its own, this is more than enough to keep $NEU cash generative because outside of clinical trials, the organisational costs are pretty lean. RoW trofinetide is pure surplus cash, and NNZ-2591 for PMS and PH (again, both in the success case) leads to such a strong cash generation in 5-10 years time, extending the growth trajectory.

I think there could be a meaningful dividend stream from 2027 or 2028.

Of course, at this stage we don't know what the commercialisation model is for NNZ-2591. Will it be licenced, or will $NEU build its own S&M workforce starting in the US? The latter would lead to capturing more of the margin, but it would increase the cost base of the business. Considering DAYBUE, $ACAD said there are 700 unique prescribers at this point, and that they have covered 100% of the market. For PMS and PH, assuming a similar structure, this would require a more focused and specialised salesforce or perhaps only 50-100 field staff. While this will increase the cost base by c. $5-10m, this is still small in the context of the revenues being generated.

(As a complete aside here, we have to recognised that $ACAD doesn't have a footprint outside North America, as I understand it. This needs to be considered together with the regulatory timeline in thinking about revenues coming from outside the US. Presumably, $ACAD has the freedom to contract out.)

As you indicate, the development work won't stop. $NEU are clearly already doing preclinical work to select future targets for NNZ-2591 in other neurological conditions. That R&D is a relatively low cash burn. That's the advantage of a "platform" molecule, and they don't have to spend much (if anything) on the pure research. That's a massive part of the traditional R&D cost structure of normal pharma companies that $NEU doesn't need....yet.

Of course, for $NEU to become a long-term leader in neurological theraphies, it eventually has to undertake pure research, or licence in other molecules, e.g., at Phase 1 or before. It cannot become the next CSL without that. So, eventually, Jon will need to set out the long term R&D strategy. And because of the long lead times in biotech research, this is something he should not wait too long to setting his mind towards, and a good board will nudge him in that direction if he isn't already thinking about it.

For a small pharmaceutical company like $NEU, in modelling cashflows out into the future, it is probably wise to assume that around 25%-30% of revenue eventually goes into R&D.

Because it is unclear to me what the long term pathway for $NEU is, and because there are so many branches in the decision / value tree, I am choosing the easy way out to value the decision (or outcome) branches over the next 3-5 years simply using some M&A multiples (as that is also a very likely outcome for $NEU).

Talking about CSL, I think it IPO'd in 1994 and paid a small dividend in 1998, 4 years later. The dividend stream has been quite small, but grown progrssively year on year. Even in 2023, dividends paid of $1.1bn represented only 8.6% of revenue.

In conclusion, I think there will be some dividends in the medium term, but the more important questions are: is NNZ-291 a platform molecule with huge commercial potential? And will $NEU build R&D capability to become a sustainable leader in its field for the long term?